A consultancy agreement is a way for businesses to engage an individual without establishing an employment relationship with them. It is our Employment Law team's responsibility to explain the differences between consultancy agreements, their benefits and disadvantages, and to outline some of the clauses that may be included in such agreements.
Individual consultancy agreement for self-employed individuals
Consultancy agreement are contracts entered into between a business (the client) and an independent contractor (the consultant). The consultant is in business for themselves and will be required to self-assess their income tax. The consultant enters into a contract with the client for the purpose of performing services.
Consultancy agreement for personal service companies
Using a personal service company (PSC) as a means of consulting is another common type of agreement. In this type of agreement, the consultant owns the service company and acts as its sole director as well as its employee. Consultants do not enter into contracts with clients; their PSCs do. Upon receiving an invoice, the client pays the consultant's PSC for the personal services provided to the client.
For tax purposes, medium and large employers may consider consultants to be employees under IR35 if they engage consultants through their PSC. For each consultant engaged in this way in April 2021, the client must prepare a "Status Determination Statement." In the SDS, the consultant must state whether he or she truly is self-employed or an employee. Consultant fees (which may be deducted from the client's pay) are taxable and employee NICs must be deducted by the "fee-payer" through PAYE if the consultant is considered an employee.
The benefits of a consultancy agreement
The use of consultancy agreements can be useful if you need a specific set of skills or expertise that a consultant can provide on a limited basis. As a result, they are more flexible and give you more freedom to set out how the relationship operates as compared to an employment relationship. They are also free from many of the statutory obligations and liabilities that govern employment relationships.
The drawbacks of a consultancy agreement
Compared to employees or workers, consultants are much less controlled by businesses. Your confidential business information might need to be protected in the consultancy agreement because consultants are generally not under implied duties of fidelity or confidentiality. You should, however, be aware that any clause that increases your control over a consultant may result in the consultant being considered an employee.
IR35 imposes additional obligations on you if you hire consultants through a PSC, as explained above.
Conclusion
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